QUESTION: In March 2014, Jeremy and his wife Maxine, who were living in the Blue Mountains at the
time, saw an advertisement in the Domain section of The Sydney Morning Herald for the
sale of a duplex in the Sydney suburb of Marrickville for $1,250,000. It consisted of two
three-bedroom flats described as “the renovators dream”. These two flats were on
separate titles. Inspection revealed that although the property was in a run-down
condition, it was quite livable. They decided to buy the property and live with their children
in the bottom flat while they rented out the top flat.
The signed contracts were exchanged for the premises on 15 May 2014 and the purchase
price of $1,250,000 was paid on 28 June 2014, when the property was formally conveyed
to Jeremy and Maxine. Soon after this, Maxine’s parents, who were living in the countrytown
of Bathurst, both had major health crises. Jeremy and Maxine decided that it would
be best to have her parents re-locate to Sydney, and live closer to them, so that they could
monitor and support them during their treatment.
Following the purchase of the duplex, Maxine’s parents moved in and lived rent-free in the
upstairs flat continuously for the entire period of ownership, whilst Jeremy, Maxine and
their children lived in the bottom flat.
The following outgoings were incurred in relation to the Marrickville property:
a. Before purchasing the property, it was necessary for Jeremy and Maxine to travel
to Sydney to inspect the property. On two occasions during this period, they had
to stay overnight at a hotel in Sydney. The cost of transportation to Sydney and
accommodation in Sydney amounted to $1,400
b. Stamp duty at the time of purchase was $72,000
c. Legal expenses on purchase amounted to $4,300
d. The cost of obtaining and registering a mortgage (loan) of $850,000 on the property
was $2,700.
e. Monthly interest payments on the mortgaged loan $3,100
f. Annual local government rates (taxes) on the property $3,200.
g. Before moving into the property they had it painted throughout and several minor
repairs completed. A contractor was paid $18,000 for this activity. Jeremy also
helped the contractor and contributed 60 hours of his own labour. His labour was
valued commercially at $58.00 per hour.
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h. On 24 February 2016, the roof began to leak. Inspection revealed it was not worth
repairing, so it was replaced in April for $73,000. The materials used were far
superior to the original tin roof that was on the building.
i. In March 2017 a storm broke windows on both levels – repairs cost $895 for the
upper level and $350 for the lower level.
2017 was a bad year for the family. Both parents of Maxine died within a month of
each other in April. In early May, Jeremy suffered a stroke and was unable to work.
Jeremy’s declining health meant that they struggled to meet the mortgage
repayments as well as the rising costs of maintaining the property. As a result,
Jeremy and Maxine decided to sell the property.
SO:
j. On 23 June 2017, they entered into a contract to sell the entire property for
$1,820,000. Agent’s fees for this sale were $13,200 and solicitor’s conveyance
fees were $3,300.
k. Also on 23 June 2017 they sold two other assets. The first was a painting that
they had purchased on 10 December 2013 for $7,000. This painting was sold for
$8,500. The second was a Ming vase they purchased an art market in Hong Kong
on 22 February 2014 for $10,000. They sold this for $200 (it turned out to be a
fake).
REQUIRED:
Jeremy and Maxine seek your advice on the following matters:
i. They would like to find out whether the sale of the property would give rise to
any CGT liability, considering the fact that the ground floor flat was their main
residence, and that Maxine’s parents lived in the top floor flat rent-free. Please
provide explanations to support your answer.
(4 marks)
ii. They would also like to find out whether they can claim deductions for the
expenditures listed in items (a) – (j) above, that they can offset against their
incomes in the relevant year? Would it have made any difference if the
property had been rented out on an arms-length basis?
(4 marks)
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iii. Explain and calculate (for relevant transactions) any capital gain resulting
from the transactions listed above. Please show all workings and provide
explanations.
(8 marks)
iv. If any capital gain has been made, how much tax is payable?
(3 marks)
v. Your advice to Jeremy and Maxine on the matters outlined above (excluding
the calculations) must be presented in the form of a report to the clients.
(1 mark)
IMPORTANT: You must provide reasons – (as well as cases, relevant ATO rulings,
and provisions of the tax legislation) - that explain and support your answer. Failure
to provide reasonable explanations will result in very low marks.
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